Individual versus institutional investors and the weekend effect

Since the late 1980’s, considerable research has focused on the behavior of individual versus institutional investors and the potential patterns which may emerge from their trading activities. Miller (1988) and Abraham and Ikenberry (1994) posit that the tendency for negative Monday returns on equity (i.e., the weekend effect) is at least partially explained by the trading behavior of individual investors. Sias and Starks (1995), on the other hand, present empirical evidence showing a dominant role played by institutional traders. This study contributes to the literature by distinguishing between individual versus institutional trading as it relates to the weekend effect. We find that the information-processing hypothesis is consistent with observed institutional trading patterns, thus supporting the results of Sias and Starks (1995). In addition, these results are shown to be robust with respect to market type (i.e., auction and dealer markets).     

Price discovery in commodity derivatives: Speculation or hedging?

We investigate whether commodity futures or options markets play a more important role in the price discovery process in the six most actively traded markets: crude oil, natural gas, gold, silver, corn, and soybeans. Using new information leadership techniques, we report new evidence and report that both markets make a meaningful contribution to price discovery in recent times; however, on average, options lead futures in reflecting new information for a majority of these commodities. We find that increased speculation, rather than hedging activity, in commodity derivatives is a key determinant of price discovery in the options markets.     

Dividend Consistency: Rewards,Learning, and Expectations

The fact that many companies have a long track record of consistent dividend increases suggests that managers believe there is some benefit to establishing and maintaining such a pattern. Many companies, for example, follow a perennial policy of increasing the dividend in a particular quarter, maintaining it at the same level for the next three quarters, and then increasing it in the same quarter of the following year. But does the capital market reward companies for maintaining a consistent dividend policy? Do companies with a history of repeated dividend increases earn long‐term positive abnormal returns; and if so, how long do the returns persist? The authors find that companies earned significantly positive abnormal returns following each of the first five annual dividend increases, over and above the positive announcement‐month returns. Nevertheless, the reward decreases as the track record of dividend increases becomes longer. After the first dividend increase, companies enjoy significantly positive returns for the next two years. Companies that increase the dividend in the same quarter of the following year also enjoy significant positive returns, but returns that are smaller (and less statistically significant) than in the case of first‐time dividend increases. And as the dividend‐increase track record further lengthens, the size and statistical significance of the abnormal returns continues to shrink; and after the sixth dividend increase, the abnormal returns in the next twelve months are statistically indistinguishable from zero. In sum, although there is some support for maintaining a consistent dividend policy, the market response diminishes over time, and investors do not earn abnormal returns by buying stocks whose annual dividend has already been increased six or more times.     

Are Certain Dividend Increases Predictable? The Effect of Repeated Dividend Increases on Market Returns

The authors report the findings of their study of over 400 stocks of public companies that announced at least 20 consecutive increases in their dividends during the period 1999 and 2009. With the assumption that the stock market learns to anticipate future dividend increases from current patterns, the study was designed to answer the question: How many increases does it take for the market to anticipate, and “price in,” the pattern of dividend increases? The authors report finding that abnormal returns around the first and second announcements of dividend increases are significant and positive, but are much less significant for the third and further increases. They also find that the size of the dividend increases tends to fall with more increases, and that the largest percentage dividend changes occur early in the sequence.     

Stock Splits and Bond Yields: Isolating the Signaling Hypothesis

One explanation offered for stock splits is that the split signals positive information by reducing the stock price range in expectation of improved future prospects. Price declines also lead to changes in stock price dynamics, but related securities are not subject to these other changes and therefore can be used to provide a separate assessment of the markets’ interpretation of the split. We examine corporate bond issues around stock splits and find a significant decline in the bond yield spread following stock splits, supporting the signaling hypothesis. We also confirm improvements in forecasted and realized earnings subsequent to stock splits.     

An analysis of Australian exchange traded options and warrants

This study focuses on the price discovery process in Australian option and warrant markets. Characterizing these two markets in terms of their cost structures and institutional features, we formally test competing price discovery hypotheses. The general findings indicate that the warrants market is the dominant market suggesting that their lower trading cost outweigh their less attractive institutional features. Additionally, we find that idiosyncratic differences among firms may result in a clientele effect thus providing justification for the coexistence of these seemingly redundant markets.     

Reversing the lead,or a series of unfortunate events? NYMEX,ICE, and Amaranth

A number of studies compare the efficiency and transparency of floor trading with automated/electronic trading systems in the competition for order flow. Although most of these studies find that electronic systems lead price discovery, a few studies highlight the weaknesses of electronic trading in highly volatile market conditions. A series of unusual events in 2006, sparking extreme volatility in natural gas futures trading, provide an ideal setting to revisit the resilience of trading system price leadership in the face of high volatility. We estimate time‐varying Hasbrouck‐style information shares to investigate the intertemporal and cross‐sectional dynamics in price discovery. The results strongly suggest that the information share is time‐dependent and contract‐dependent. Floor trading dominates price discovery in the less liquid longer‐maturity contracts, whereas electronic trading dominates price discovery in the most liquid spot‐month contract. We find that the floor trading information share increases significantly with realized volatility. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:1130–1160, 2009     

Asymmetric Volatility, Correlation and Returns Dynamics Between the U.S. and U.K. Securitized Real Estate Markets

We construct synchronously priced indices of securitized property listed on the New York Stock Exchange and London Stock Exchange. The indices are then utilized to examine dynamic information flows between the two markets. By analyzing returns behavior, asymmetric volatility spillover effects and exceedance correlations, this study shows that the real estate markets in these two countries experience significant interaction on a daily basis when synchronously priced data are utilized. These results are different from when close-to-close returns are examined, implying that the use of close-to-close data can misconstrue the true dynamics that exist between these markets. Results also show significant asymmetric effects on both the volatility and correlation dynamics between the markets. This has several implications for property portfolio managers, indicating that positive and negative news impact the markets differently. This is particularly true for the United Kindom, where daily foreign news from the United States can influence U.K. volatility.     

DAY‐END EFFECT ON THE PARIS BOURSE

We study the day‐end effect on the Paris Bourse, a computerized order‐driven market with competing dealers. The day‐end return is approximately double the magnitude found in U.S. data and is nearly four times larger for stocks trading with a registered dealer. However, this is largely explained by the time between trades and the bid‐ask spread. Unlike the U.S. data, the effect does not decline as stock price increases, probably because of a variable tick size in the Paris market. Finally, a change to a closing call auction in May 1996 for a subset of stocks did not reduce the day‐end effect.